Phoenix's Hard-Hit Housing Starts to Rise From Ashes

20-Apr-2012

Friday, 20 April 2012 7:46 AM ET
It was one of the worst housing markets in the U.S., but now investors are swarming over foreclosures in Phoenix, Arizona, in search of big rental returns
Source: CNBC.com | By: Diana Olick

Mike Ripson hasn't built a home in three years, but he is about to. He has been sitting on one hundred sixty acres of land just outside Phoenix, Arizona, which he intends to divide into 121 one-acre lots.

"Now's the time because we've been studying the marketplace, and we noticed beginning late last summer, early fall, that for homes priced less than $100,000, the market was becoming very tight," says Ripson, whose company is celebrating its ten year anniversary this week.

"Over the last several months that price point has increased such that today, homes priced less than 300,000 dollars, there's less than a thirty-day supply in the marketplace," Ripson adds.

The supply of homes for sale in the Phoenix area is down 42 percent from a year ago, and foreclosures are down 52 percent, according to Michael Orr, of the Real Estate Center at ASU. That is bringing demand back to the builders.

Ripson is building about 40 miles outside of Phoenix in Wittmann, where there is less competition from foreclosures.

"To give you an example, within a five mile radius of where we sit here at Sonoran Acres, two months ago there were 18 homes on the market. Today there's only one," says Ripson.

That's why he re-opened his model home two weeks ago, and immediately saw high buyer traffic. He filed permits for two new homes, which he expects to sell in the next few weeks, thanks to his low, $200,000 price point.

Closer in to Phoenix, prices are a bit lower, thanks to a higher supply of distressed properties, but those properties are selling fast as well, as large scale and institutional investors flood the market.

"I really think we're at the top of the first inning in terms of this opportunity, and there will be ebbs and flows, ups and downs, people will come in and come out," says Justin Chang, principal at Colony Capital, which intends to invest over a billion dollars in distressed properties this year.

"But if you're looking to build a business over the next five to seven years, this is the first inning, and we're pretty excited about it," Chang goes on to say.

Colony has a history of investing in commercial real estate, but about a year ago they saw the potential as well in the single family rental market. They began building an infrastructure, and started buying homes last month from banks, the government and at auction.

They own 170 homes in three states so far and intend to close on fifty more this week. They spend $3,000 to $5,000 rehabbing each home and readying it to rent. Their team is entirely internal, which they say saves them extra costs.

"We've got our internal team doing acquisitions, we've got our internal team doing the rehab and we've got an internal team doing the property management. These are employees," explains Jay McKee, COO of Colony American Homes.

"We have 120 people on our payroll, W-2 employees, right now doing this work. A lot of other folks are doing it by outsourcing to third parties," says McKee. "We think by doing it in house, we can do it without markups."

At a Colony home in Laveen, AZ, a suburb of Phoenix, workers were installing new appliances into a former foreclosure, as the old ones had been stolen. Nearby, a large development from Pulte Homes advertised new construction starting at $100,000. McKee is not concerned.

"There are people who cannot buy those homes, and those are our clients. The people that lost their home to foreclosure, are repairing their credit, or just decided they don't want to be owners of properties anymore, they're our client," confirms McKee.

Colony is considering a program to help their renters become buyers, much like some rent-to-own programs being considered by banks and the government. Colony has also been pre-approved to bid on Fannie Mae foreclosures through a new pilot program by the Federal Housing Finance Agency (FHFA).

"We really understand what they want to accomplish, and we think we can be good partners," says Chang. "The pilot programs that are out there now are very smart, and I hope they are the first of many.

Colony is just one of a growing cadre of investment teams buying distressed real estate to rent. Chang expects to see returns of anywhere from 15 to 25 percent on his investment. Cash flow is almost immediate. He says he can rehab a home in three days and have it rented in less than a month. 85 percent of Colony's homes are already rented.

As for competition in the space, which Chang calls a pioneering asset class, he's not concerned.

"The opportunity is so vast that there's room for a lot of companies," Chang says. "Eight to ten million homes will be foreclosed over next 3-5 years. That's $800 billion in capital required. Fifty other firms could do it, and it still would be a drop in the bucket. We're really just a small part of the game at this point."